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Economy January 22, 2026

Japan's Core Inflation Moderates in December While Remaining Above Bank of Japan's Target

Data signals steady inflation pressures as BOJ contemplates future policy moves amid economic recovery

By Ajmal Hussain
Japan's Core Inflation Moderates in December While Remaining Above Bank of Japan's Target

Japan's core inflation rate eased in December compared to the previous month yet stayed above the Bank of Japan's 2% goal, sustaining expectations of potential interest rate increases. Despite the slowdown caused mainly by base effects from last year's energy price surge, underlying inflation remains robust. The BOJ is expected to maintain its policy rate at 0.75% but hints at possible further rate hikes to support ongoing economic recovery.

Key Points

  • Japan's core CPI rose 2.4% year-on-year in December, reflecting a slowdown from November's 3.0% increase.
  • The BOJ’s preferred measure, excluding fresh food and fuel, increased by 2.9%, indicating persistent underlying inflation pressures.
  • The Bank of Japan is expected to keep its policy interest rate at 0.75% but signals readiness for further increases to support a steady economic recovery.

In December, Japan's core consumer price index (CPI), which excludes the volatile fresh food sector, grew by 2.4% year-on-year, marking a decline from the 3.0% rise recorded in November. This data, released on Friday, aligns with median market expectations and indicates a moderation in inflation pace. The downward trend is primarily attributed to the base effect stemming from a previous spike in energy prices, which had surged due to the cessation of government fuel subsidies last year.

Moreover, a more refined inflation gauge, which excludes both fresh food and fuel prices and is closely monitored by the Bank of Japan (BOJ) to gauge underlying inflation trends, registered a 2.9% increase in December, slightly lower than the 3.0% increase in November.

At the close of a two-day policy meeting on Friday, the BOJ is widely expected to sustain its key policy interest rate at 0.75%. However, signals suggest readiness to continue incremental hikes in borrowing costs as Japan navigates a period of moderate economic recovery. The central bank had previously ended its decade-long expansive stimulus program in 2024 and embarked on incremental interest rate increases, including a move in December, based on assessments that the economy is making steady progress toward achieving a durable 2% inflation target.

Risks

  • Continued inflationary pressures above the BOJ's 2% target could prompt additional interest rate hikes, potentially affecting borrowing costs and economic growth.
  • A slowdown in inflation momentum due to base effects may complicate the BOJ’s assessment of underlying inflation trends, impacting monetary policy decisions.
  • The persistence of inflation elevated beyond targets amid external shocks such as energy price fluctuations presents uncertainty for economic stability and market performance.

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